206-Finding a Home for Orphaned Products

The pharmaceutical industry has taken steps in the last few years to reduce the cost of bringing a new drug to market. Pfizer has developed a novel approach.

We have analyzed several thousand cost reduction efforts. Each of these efforts, in one way or another, seeks to improve the productivity of costs by improving the amount of Output that a given quantity of Input can produce. We have found four basic approaches to improving this productivity: 1) reduce the rate of cost for the Input; 2) reduce Inputs not producing Output; 3) reduce unique activities in processes and products; and 4) spread fixed cost activities over new Output. (See StrategyStreet.com/Improve/Costs/Directions)

The pharmaceutical industry has used these approaches to reduce the cost and risk of developing new medications. For example, some companies have signed agreements with scientists overseas to develop new products (example #1 above). Others have used contract research organizations (example #1 above). Many have established joint ventures with competitors to spread the risk of developing new drugs (example #4 above).

Pfizer has developed a new organizational unit to use the second approach, reduce Inputs not producing Output. The company set this unit up in 2007 and named it Indications Discovery Unit. This organization enlists outsiders for help in finding uses for compounds that Pfizer had in development but that seemed to have no market potential. In a recent iteration, Pfizer agreed to pay $22.5 million over five years to researchers at the medical school of Washington University in St. Louis. Pfizer will give these researchers access to 500 molecules that otherwise would languish. These molecules were approved for a different use, were developed for a separate indication or they failed during testing for another use. This cost management innovation enables Pfizer to find new uses for work-in-process inventory that otherwise might have been written off.

Posted 7/22/10

Update:

This Pfizer initiative seeks to use otherwise unproductive inputs of people purchases and capital. This is one of the five most common approaches to improving efficiency in the company. Efficiency is measured as the number of units of input per unit of departmental or workstation activity, which we call and Intermediate Cost Driver. So, efficiency equals input (I) divided by the Intermediate Cost Driver (ICD). See HERE for more explanation and examples of initiatives to improve efficiency by reducing wasted inputs.  You may use these examples to improve the cost structure in your company

10/22

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